The Department of Mines, Industry Regulation and Safety in WA has published data revealing that there was a 43% increase in Programme of Work applications received by the Department in the 2017 calendar year.

The Department received 2575 Programme of Work applications in 2017, compared to 1799 in the previous calendar year. Mining legislation in WA requires a Programme of Work to be approved before an explorer can conduct any ground disturbing activities with mechanised equipment.

Strategic Projects Senior Adviser, Graham Cobby, attributed the increase in exploration applications to increasing interest in two commodities, one being gold. Exploration applications in the December 2017 quarter remained steady and Mr Cobby considers it likely that the high interest in gold in 2017 will continue in 2018.
Notably, Newmont Mining announced late in 2017 that it will spend $350m-400m on gold exploration in 2018 which is nearly double its $200m budget in 2017.

Some of that exploration expenditure can be expected to flow into Newmont Mining’s Australian operations.

Nationally, gold exploration expenditure was up 14.6% year-on-year in Q4 2017 which indicates that gold exploration expenditure is also increasing outside WA.

For the first time since 2013, there was an annual increase in jewellery demand in 2017.

Demand from India, China and the United States drove the annual increase. Incomes in India and China have been rising which is expected to fuel higher discretionary spending on gold in 2018 and 2019.

Developments in the Indian gold market were most notable and contributed to the 12% increase in the demand for gold in India in 2017. The introduction of stricter regulations in India in July 2017 surrounding jewellery sales encouraged consumers to bring forward their gold purchases. This led to gold jewellery consumption decreasing by 3.4% year-on-year in Q3 2017. However, Indian jewellery demand bounced back in Q4 and reached the highest Q4 on record when demand hit 190 tonnes. Demand in Q4 was driven by the wedding and festival season as well as a drop in the rupee gold price. A further boost in demand was driven by the Indian Government granting the gold market an exemption from burdensome anti-money laundering initiatives which removed the burden of consumers and retailers having to prove the legitimacy of their cash transactions.

Total world gold supply in 2017 was down 4% on the previous year, from 4591 tonnes to 4398 tonnes. While world gold production reached a record high in 2017 of 3268.7 tonnes, it was only marginally higher than the 2016 record of 3263.0 tonnes and the global production results for Q4 2017 indicate that production is decreasing.

Tighter environmental regulations in China saw national production for the world’s largest gold producer decrease by 10% year-on-year in Q4 2017. Mine production was also down in Tanzania by 15% in Q4 which was attributable to the continuing Tanzanian Government ban on concentrate exports from Acacia Mining’s Buzwagi project.

The supply of recycled gold levels also returned to normal when they fell 10% year-on-year in 2017 following the abnormally high levels seen in 2016.

In Australia, gold mine production increased by 2.6% year-on-year in Q3 2017. Higher production was attributable to increased output at various mines, including at AngloGold Ashanti’s operations at Sunrise Dam and the Tropicana joint venture where production increased during the quarter by 24% and 15% respectively.
Recent market developments indicate that Australian mine production is showing no signs of slowing down. Numerous gold miners have announced higher gold production towards the end of 2017 and in early 2018, including Blackham Resources at the Matilda-Wiluna operation, Red 5 at its Darlot gold mine, Ramelius Resources across its Edna May, Mt Magnet and Vivien gold mines, RNC Minerals at its Beta Hunt gold mine, Pantoro at its Nicolsons operation and Doray Minerals at its Deflector mine. Other producers such as OceanaGold reported record output in Q4 2017 and Newcrest Mining reported a large increase in production in Q4 2017 off the back of a 50% increase in production at its Cadia Valley gold mine.

Demand in the technology sector for gold increased 6% year-on-year in Q4 2017. Driving this demand was the volume of gold being used in smartphones, laptops and vehicles. In the electronics sector, gold bonding wire is used in memory chips for smartphones and also in sensors for smartphones, laptops and vehicle safety features.

Demand from the wireless electronics sector was the strongest performer. Demand was fuelled by wireless chip manufacturers and an increased usage of sensors in smartphones which power new smartphone features such as 3D video, virtual reality, augmented reality, iris recognition and gesture recognition.

There were strong inflows into gold backed exchange traded funds (ETFs) in 2016. Those inflows dried up in 2017, down a substantial 63% which led total investment inflows in 2017 to shrink 23%. The outflows from gold backed ETFs largely occurred in the second half of 2017. Those outflows are explainable to a degree given that gold prices were up over 10% in mid-2017 from the opening prices of 2017 and investors were likely capturing gains as opposed to further buying.

We expect this trend to continue in 2018 as investors seek to capture gains as gold prices continue to make ground over the opening prices of 2018.

Uncertainty in global markets continues to be a key factor driving gold prices.

As a counter-cyclical commodity, gold is considered to be a safe haven investment in times of economic uncertainty. While the global economy improved in 2017 and risk assets rose in value (for example, the ASX200 was up 7.1% and the S&P500 was up 19%), uncertainty in global markets drove and underpinned the performance of the gold price.

Geopolitical instability has been a strong source of uncertainty. Political risk heightens investor uncertainty which can fuel inflows into gold as investors seek to diversify and reduce the risk of their portfolios.

Political instability in the United States is the major contributor. In the lead up to the US presidential election in 2016, political uncertainty saw gold prices hit three-year price highs.

While gold prices fell sharply following President Trump’s conciliatory speech in November 2016, political uncertainty in America continues. Over a year on since President Trump was sworn in, his governance style has emerged as unpredictable. This unpredictability fuels inflows into gold and makes gold an attractive asset for investors to hold on to in their portfolios as a hedge against economic uncertainty.

Continued tensions between Western nations and North Korea also contribute to the current state of political uncertainty and the attractiveness of gold as a safe haven investment. We expect these tensions to continue leading up to the proposed meeting between President Trump and North Korean Supreme Leader Kim Jong-un.

Equities had a strong year in 2017 with many assets, including major stock indices, achieving new highs. Despite this, gold continues to perform well. This indicates that investors may be fearful of a correction in equities and are managing their risk exposure by increasing their gold reserves.

In late 2017, WA Treasurer Ben Wyatt revealed a revised proposal to increase the gold royalty rate by 50%, effective 1 January 2018.

The revised proposal came a few weeks after Treasurer Wyatt’s initial proposal was voted down by the Upper House. Under the initial proposal, the royalty rate was to increase from 2.5% to 3.75% when the gold price was above A$1200/oz. Under the revised proposal, the royalty rate was also to increase by 1.25% but only when the gold price was above A$1400/oz and a 2500 ounce royalty free threshold would also apply.

Industry backlash was widespread. The Association of Mining and Exploration Companies and the Chamber of Minerals and Energy of WA expressed concerns over the significant negative impact a rate hike would have on the gold industry and its associated industries. Of main concern was the potential detrimental effect a rate hike could have on employment.

Despite the expectation that the rate increase would raise $332 million over four years, other political parties publicly opposed it. Only soon after its revival, Treasurer Wyatt’s revised proposal was given the axe when a number of political parties teamed up to pass a disallowance motion.

In WA at least, gold miners are assured for the time being that their margins will not be affected by an increase in the gold royalty rate.

2017 was a year of synchronised global economic growth which saw global GDP grow in excess of market expectations. A contributing factor to that growth was the accommodative monetary policy set by central banks globally as quantitative easing policies were maintained.

This accommodative monetary policy helped underpin the gold price in 2017 and so far in 2018 as gold retains its appeal as a valuable asset to hold in portfolios despite not being an interest bearing asset.

Another year of synchronised global growth is expected by the market in 2018. With this growth, central banks can be expected to rein in their quantitative easing measures and increase interest rates to counter inflationary pressure. Signs of changing monetary policy globally are emerging. In the United States, Federal Reserve Chairman Jerome Powell informed US Congress members in late February that gradual interest rate increases in 2018 will proceed.

In the United Kingdom, the Bank of England lifted its benchmark interest rate for the first time in a decade from 0.25% to 0.5% in November 2017. In the Eurozone, the European Central Bank has indicated that it will shift away from its expansionary monetary policy stance. However, in Australia, the Reserve Bank decided in early April 2018 to maintain the cash rate at 1.5% which is the rate that has prevailed since August 2016 and is the 20th consecutive month the rate has remained unchanged.

Downwards pressure on the gold price due to changing monetary policy globally can be expected in 2018 as rising interest rates will attract investors to interest bearing assets.

Looming fears of a trade war breaking out between China and the United States has contributed to the uncertainty in global markets which is driving gold prices.
Whether China and the United States are in the midst of a ‘trade war’ is open for debate. However, President Trump and the President of the People’s Republic of China, Xi Jinping, have certainly been going back and forth in an exchange of tariffs over imports into the United States from China and imports into China from the United States.

Most notably, President Trump issued proclamations imposing tariffs on the imports of steel and aluminium into the United States from all countries except Canada and Mexico.

These tariffs have significant ramifications for China as a strong exporter of steel and aluminium.

The Chinese Government responded by announcing it will impose tariffs on imports from the United States worth around US$3 billion which includes taxes on United States agricultural products. Following this, the United States and China exchanged announcements of potential tariffs in early April 2018 ranging from US$50 billion to US$100 billion which target imports into the United States from China and imports into China from the United States.

With China and the United States continuing to go back and forth in an exchange of tariffs, there is little sign of the trade tensions resolving soon. We expect this to continue to create uncertainty in global markets and drive the gold price in the near future.